Category: Finance

Fannie Mae Tightens Guidelines Again

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Fannie Mae is tightening lending standards (here and here).

This follows regulators allowing the borrow and lend more extensively, in an attempt to bolster the housing market.

Upper management at FNM gets it. That the market is completely fscked, and if they don’t tighten up, they will get swamped.

Changes to their standards for buying loans:

  • Minimum credit score of 580.
  • It won’t buy, “Delinquent loans that have fallen 60 or more days past due in the last year”.
  • It won’t buy loans to borrowers who have been foreclosed on in the past 5 years (used to be 4 years).

Calculated risk has some more details, and there are some additional standards which appear directed towards dissuading people from walking away from properties where they are under water (aka jingle mail).

OK, You Are Not Getting Any Sleep Tonight….

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Yesterday, Marketplace had a store about a complex financial instrument called a “default credit swap“.

They try to explain what it is, and the best they can do is say is that it is some sort of complex financial transaction that serves as a sort of insurance against companies defaulting on their loans.

But that’s not what they are, that is their intended purpose.

This excerpt of the exchange may clarify a bit:

MOON: Well, this is where it gets tough, Kai, because a lot of people on Wall Street, even some of the leading economists in the academic world, don’t really understand exactly how these things work. A lot of them are whipped up with some computer wizardry, some advanced math — think of those fancy Greek letters turned on their sides. And there’s a lot of guesswork to this, too, about how much they’re really worth.

Boy…That makes it a lot clearer, doesn’t it?

So we have another derivative like instrument where there is no value that can be understood. In fact, most of the people who trade this stuff not only don’t know the value, they don’t know what it is.

It could be bellybutton lint futures for all we know, and for all Wall Street knows.

RYSSDAL: All right, so what’s the problem, though, if everybody agrees that they don’t know what they’re worth?

MOON: Well, the critics I’ve spoken to complain that they’re really nothing more than gaming instruments — gambling. Turns out that the big hedge funds that attract so much money from rich investors and big institutions, well, they’re playing the market on their own, and they don’t even need to have a stake in a particular company to do that.

RYSSDAL: I’m going to make the analogy here to a March Madness office pool, right? I go in, I pick a basketball team, and if they do great, that’s great, but I’m not vested.

It is. Except instead of wagering on UCLA and Auburn, these big bankers and brokers and hedge fund managers pick up the phone and they negotiate these wagers privately. Nobody really regulates this. They’ve created this incredibly enormous shadow financial system, if you will, that’s virtually hidden from investors and analysts and regulators.

You know when those high energy physicists do that complex stuff that explains how to smash two pieces of metal together to wipe out Hiroshima, I feel a bit more secure about this.

RYSSDAL: How big would “incredibly enormous” be?

Good question. I’d like to know how many billions of dollars are nothing more than fairy dust.

MOON: OK, I’m about to unload some numbers on you here, so I’ll speak slowly so you can follow this.

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.

RYSSDAL: That’s a lot of money, Bob.

Ummm…why yes, it is. Doing math in my head 4.5×1013/3×108=1.5×105, or in normal notation, about $150,000.00 for every man, woman, and child in the United States of America.

MOON: It is, and the great unknown here is that these things get traded, or swapped, between the banks and hedge funds and other investors, and there’s really no one who oversees or regulates these trades to guarantee that the buyer actually is going to be able to make good on these if they have to. And these things end up being so interconnected that it’s not just like single line of dominoes falling, if one fails. Imagine one falling domino taking down two more, and those taking down four more, and eight, and so on.

I don’t know about you, but I’m spending this evening gibbering inconsolably.

Here is the full audio, including some comments from an expert on this that is even less reassuring, and the tid-bit that Alan “Bubbles” Greenspan loved these.

Economics Update

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Let’s see, we have Bernanke, testifying before the Congress’s Joint Economic Committee, saying that there is just the slightest possibility that the US Economy might possibly be slipping into a recession, which is Fed speak for, we are totally boned.

Not surprisingly, the US dollar tumbles, because recession=further rate cuts.

Truth be told, given the current nature of the credit markets, the Fed could lower interest rates to zero and it wouldn’t lower short term rates. They are pushing on a string, and people are unsure about the amount of risk, so rates won’t go down.

On quick numbers, we have new mortgage applications falling 29% (refi is way down too), oil prices rising, up to about $101.20/bbl, and gas prices at a record high, $3.287/gal.

On the good news side, ADP’s private report is showing an increase in private sector payrolls, though I would rever the reader to this article on underemployment, which points to growing numbers of people working part time jobs, a sign of employment weakness, for some context:

Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure [underemployment report] stood at 8.9% in February, up from 8.1% a year ago.

“We’ve clearly had a broad weakening in the labor market,” Hall said.

My perspective, and I am an mechanical engineer, which means that I value tangible goods in my world view, is that the fact that factory orders are still declining, -2.5% in January, and -1.3% in February, is a better indicator, though I also consider the fact that car sales tanked last month, including Toyota, significant too.

Of course, economists, and other such folks, tend to look at consumer spending, so the fact that Discover Financial Services reported that its consumer spending confidence index is down might be a bigger deal for them.

In real estate, we have Manhattan condo and Co-op sales collapsing. It appears that the market is now crushing, “location, location, location”.

And on the more surreal side of real estate, we are finding an epidemic of copper pipe theft from abandoned homes. The hed is a real eye catcher, “ Some homes worth less than their copper pipes“.

This makes the USA sound like it’s suffering from Baghdad level looting.

Limits to Compensation for Mortgage Brokers at Countrywide

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Ailing (and corrupt) mortgage giant Countrywide Financial has just placed a cap of 4% on Mortgage brokers.

Note that 4% is way too high, but it’s a start.

Basically, it stops incentivizing the most extreme Yield Spread Premiums (basically a “load” on the loan which largely goes to the broker) to the detriment of the borrower, the lender, and the rest of the economy.

The incentives in the current home mortgage environment is a morass of forces pushing lenders toward unsafe, immoral, and destructive loan products, and this is something that should be changed.

Nationalizing US Banks?????

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We have a report that the Federal Reserve is making inquiries with the Scandanavian banks regarding how they handled their banking crisis in the early 1990s.

What they did back then was nationalize their banks:

Scandinavia’s bank rescue proved successful and is now a model for central bankers, unlike Japan’s drawn-out response, where ailing banks were propped up in a half-public limbo for years.

…

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks – Christiania Bank and Fokus – were seized by force majeure.

“We were determined not to get caught in the game we’ve seen with Bear Stearns where shareholders make money out of the rescue,” said one Norwegian adviser.

“The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.

Works for me.

Senior management gets the boot without golden parachutes, shareholders get nothing, and then people think twice before they pull this crap again.

Unfortunately, property is the one true religion of the good old USA, so I don’t think that it would work here.

But it is probably the best solution.

Economics Update

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First, let me complain, yet again, about the nature of financial reporting. They are neck deep in dung, but they continue to look for a pony.

Cases in pointL

The the Institute for Supply Management’s (ISM) manufacturing index rose to 48.6 from 48.3 in February, which while higher than the 47.5 anticipated is still a contraction. Any number below 50 is a contraction. The index is a derivative (the calculus type, not the financial type), with 50 being zero. 48.6 is still a trend down, and this should be the lede.

Then we have construction spending “falling less than expected“. Again, construction spending fell, and while the “consensus” was 0.9%, and it fell 0.3%, this isn’t news, unless you tell us who, or why the consensus was that number.

Grrrrr.

On the “economic news for the rest of us” front, we have predictions that 200,000 jobs will be eliminated in the banking sector, and the number of food stamp recipients has gone through the roof.

BTW, if you are wondering if the real estate collapse is just a locak phemenon, the answer is no. We are now seeing the beginnings of a real estate collapse in china, and the housing crunch has now moved to the Hamptons.

Shanghai and the Hamptons. When you look at the range covered, there ain’t much left outside of this.

In the world of currency, it appears that the dollar has had the biggest quarterly loss since Q4 2004. The ECB is concerned with inflation, and quite honestly is not experiencing the same sort of meltdown that the US is, so it’s holding rates steady, which strengthens the Euro.

Finally, we have banks writing down billions of dollars (here, and here) in various bad investments. The markets rewarded them today, but I think that this will get much worse before it gets any better.

Paulson Proposed Regulatory Changes on Financial Industry

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Sec. Paulson just proposed a series of changes, and U.S. Senate Banking Committee chairman Chris Dodd response call it a , “ pitch. … It’s not even close to the strike zone.”

I agree with the distinguished gentleman from Connecticut.

My analysis is that this is an attempt to make fixing things more difficult.

In proposing that the Federal Reserve have additional regulatory authority and responsibility, Paulson is trying to transfer this from executive agencies, which would follow the direction of the next president, to an independent organization which has been loaded to the gills with Bush toadies over the past 8 years.

Additionally, by putting these powers in an organization almost wholly dedicated to monetary policy, it means that other actions, either through fiscal policy (Keynesian budgets), or regulation will get the short end of the stick.

The biggest strike against this is the enthusiastic endorsement from the financial industry. If the people who f%$#ed this up in the first place like the proposed regulatory regime, it’s likely that this regime sucks wet farts from dead pigeons.

California Eschews Bond Insurers

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It’s interesting how often financial reporters miss the forest for the trees.

Case in point, we have California Treasurer Lockyer telling Warren Buffet’s new bond insurance business to go pound sand.

The core of the dispute is that bond ratings agencies have low rated municipal debt as compared to commercial debt for years.

This has meant that entities like the state of California have had to buy bond insurance to get AAA rates, despite the fact that the risk of default is negligible:

“We’re selling water in a desert; we should be rated to reflect that,” said Cary Casey, who oversees bonds at the Southern Nevada Water Authority in Las Vegas that have a AA+ rating from Standard & Poor’s. Casey said he’s not interested in Buffett’s insurance. “He’s no savior.”

The first municipal bond insurance policy was sold in 1971 by Ambac. The near bankruptcy of New York City in 1975 bolstered demand for the industry, said Richard Larkin, research director at brokerage Herbert J. Sims & Co. in Iselin, New Jersey, and a former chief municipal rating officer at S&P.

New York City creditors were paid in full. When Orange County, California, filed the largest municipal bankruptcy in 1994, only one issue defaulted and no principal or interest payments were missed, according to Moody’s.

“The legalized extortion has been going on since before I became mayor of Somerville in 1990,” said U.S. Representative Michael Capuano, a Massachusetts Democrat on the House Financial Services Committee. Capuano said he was forced to buy bond insurance, even though his town of 80,000 had never defaulted and the state provided backup guarantees.

Emphasis mine.

Bond insurance to municipalities have been a protection racket for years, and not it turns out that the insurers, not the municipalities, are the ones with the problem.

I think that as we tease out the credit collapse, we will find many more examples of systemic corruption and extortion by Wall Street firms.

The FSM may be wrong, these guys are pirates, and global warming proceeds unabated.

Economics Update

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In honor of March Madness:

Click image for source

You may recall that Monoliner insurer FGIC having problems. Now it is saying that was saying that it would not honor its insurance contract withCredit Agricole SA and IKB Deutsche Industriebank, because they deceived the insurers about their financial health.

Seeing as how IKB seems to be facing villagers with torches, this may very well be true.

It’s in court.

And of course, because it’s a day of the week ending with “y”, the Federal Reserve is giving away another $100 billion to the banks.

No wonder noted bear, and Oppenheimer analyst Meredith Whitney is predicting that Citi will be cutting its dividend again soon.

In economic matters for the rest of us, personal income did better than expected, but personal spending remained weak, and the head of Freddie Mac is saying that he does not expect recovery in house prices until 2010.

I say that he is an optimist. The regional crashes we have seen, which have been much less severe, have all lasted at least 5 years, which puts the date at 2012, though I would take 2015 in the over/under in non-inflation adjusted dollar terms.

I don’t think that we will be back to the 2006 highs adjusted for inflation in my lifetime.

And in the world of collapsing economic institutions, we have former sub-prime lender Fremont General ordered to find a buyer by the FDIC, in addition to restricting interest it can pay to depositors, payments to senior executives, and transfers to its parent company.

This does make the fact that the Office of Federal Housing Enterprise Oversight has told Fannie Mae and Freddie Mac that they are free to raise another $20 billion a bit nonsensical.

The taxpayers will end up on the hook for all of this.

Economics Update

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South Korea’s National Pension Service will no longer invest in US Treasuries. They are saying that the rates of return are too low.

Note that this is the 5th largest pension fund in the world, so this is a decision with consequences.

I have noted on a number of occasions that the Fed would find itself torn between keeping the economy afloat, and keeping the dollar strong, and this is the first leak in the dam.

This does not necessarily mean that they won’t be investing in the US though. While the rates treasuries are low, other interest rates are rising, with the London interbank offered rate (LIBOR) up about 1%. Mortgage rates are also not responding to Fed Rate cuts.

Search for the term “pushing on a string” in my archives. It’s a quote from Keynes.

The weekly jobless claims numbers are less than were expected, which is good news, but there is a lot of noise week to week, so I’m more concerned about Commerce Department’s final GDP numbers, which show the inflation adjusted growth of the GDP being 0.6% annually.

Additionally, investors initial reaction was to flee long term treasuries following the unemployment numbers, which implies an expectation of increasing inflation.

In terms of the market recovering trust, not so much, with asset backed commercial paper, short term asset backed debt, falling. There are no buyers for it.

Finally, Merrill will write down $4.5 billion on CDOs (collateralized debt obligations), and post a loss in Q1.

Remember, Stocks are Always the Best Long Term Investment

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Except, of course when they are not, as has been the case in what the Wall Street Journal so evocatively calls the Lost Decade, where stocks have provided no return over the past decade.

This is not surprising, seeing as how we are coming off a bubble, tech stocks segueing into real estate, and this is when stocks don’t do well.

Dean Baker asks the question the WSJ won’t, “What if your social security was invested in this?

The answer is that we, and our parents and grand parents, would be completely screwed.

Economics Update

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The first two bits are easy to understand, New home sales are the lowest since 1995, which matches with the horrid existing home sales data that I posted yeaterday, and Factory orders fell off a cliff in February.

First, things are simply getting even weirder in the never-dull world of monoliner insurers, with the Federal Home Loan Banking looking at offering bond insurance for municipal infrastructure project bonds.

It’s a dull, but very profitable racket, because there has been some sort of freaky deal between the monoliners and the rating agencies for years that has them offering artificially low ratings to muni bonds, which pretty much forces said governmental agencies to buy bond insurance.

If it works, it kills the monoliners, because this business is the only thing keeping them afloat on a sea of collateralized debt obligations (CDO).

Additionally, we have monoliner insurer FGIC notifying regulators that due to some “dodgy” dept that it is ensuring, that it is insolvent under New York State law, “FGIC in notes to its consolidated financial statements said it plans to submit a plan to the New York superintendent to reduce its risk. FGIC also said it has voluntarily ceased writing new business to preserve capital.”

This means that, theoretically at least, regulators could seize the FGIC, though they are in litigation with the borrower of the aforementioned debt, and they are filing a recovery plan.

Bear Stearns Employees Already Financially Raped, Now Possibly Enslaved – Business on The Huffington Post

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Jill Brooke is reporting that JP Morgan CEO Jamie Dimon is now calling Wall Street firms and threatening them if they attempt to hire away curretn Bear Stearns employees. (The hed, btw is Ms. Brooke’s not mine).

He’s claiming that it’s “unpatriotic” to poach people before he fires them, and he also, “threatened to cut counter-party credit lines to firms that poach Bear stars before the transaction is completed”.

If I were on the jury, I would vote to acquit his murderer.

On a slightly more law abiding note, I believe that the Bear employees might have grounds for one hell of a class action lawsuit.

Clear Channel’s Going Private Likely to Collapse

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It appears the deal for private equity firms Thomas H. Lee Partners LP and Bain Capital Partners LLC to take Clear Channel Communications’ Private is in the process of imploding.

The banks that are supposed to back the deal, “Citigroup Inc., Morgan Stanley, Deutsche Bank AG, Credit Suisse Group, Royal Bank of Scotland PLC and Wachovia Corp”, appear willing to eat the termination fees, and the private equity firms aren’t to interested in going forward either.

The only folks looking eagerly toward closing the deal are the founders, the Mays family.

The article describes the process as, “The negotiations have turned into a bizarre “kabuki” dance, said one person familiar with the situation. To protect against litigation, neither the private-equity firms nor the banks want to leave any doubt that they are committed to closing the deal. But their public actions have little to do with what’s going on in private, say a number of people involved in the matter.”

Basically, the first person to blink gets sued.

The deal is supposed to be for $19 billion, and a breakup fee is likely to be around $600 million, and if the banks repackage and resell the loan, which they really have to do, they are saying that it would have to be at around a 15% discount, which seems to me with my imperfect non-MBA math to show that it is cheaper to back out.

I wish that there was a way for all of them, particularly the Mays family, the creator of the cancer of the airwaves, Clear Channel, to lose.

Video below:

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So, the Plot Sickens with the Bear Bailout/Buyout

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Well, we have the WaPo reporting on the increased share price, and calling it “a good deal” since the stock was selling for $70 two weeks ago.

Then again, you have a noted stock analyst saying that the true cost, which includes all the debts owed, will be close to $65/share, and you have Market Watch reporter Greg Robb calling the Fed and JP Morgan’s actions putting lipstick on a pig.

Economics Update

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People are not feeling confident right now, Conference Board’s consumer confidence index fell to 64.5, and the expectations index fell to 47.9, the latter being the lowest since December 1973.

Not surprisingly, the dollar is down as a result, though the fact that the Federal Reserve continues to run those printing presses like they were making toilet paper for rancid burrito day may have contributed.

In real estate, Freddie is seeing mortgage delinquencies increasing.

We are also seeing an explosion in payday loans, which means people are being abused by the system just as Bear shareholders are getting a freebie courtesy of the Federal Reserve.